Is it time for a Best Buy?
While the market is waiting for the Fed, ECB and the results of the "Troika", or some other hyper global master of the universe, things seems to be hanging in suspended animation. Just not much is happening and most September implied volatility is trading at large premiums to realized volatility. We have a similar setup to late May/early Jun for the broader market. Basically the IV is waiting for something to happen and most likely not much will change radically. I dont have high hopes for most September juice, but of course I could be wrong. On a slower day, in a slower market take a look at some of the deal stocks.
For a trade outside of the overpriced volatility, some interesting potential is in Best Buy (BBY). The chart below is showing some divergence between 30 day implied volatility (red line) and 90 day implied volatility (green line). That is simply the market trying to price the new (potential) buy out in BBY after the CEO has gotten the go ahead for some due diligence. The market is saying not much will happen in September but a whole lot could happen down the road. The way around this is to look past the 90 day options to something in the far term, say March.
The 1 x 2 call spreads (buying 1 and selling 2) around the 22/25 range for even or better are a decent way to play that the CEO will be ultimately successful in his mid-20s bid for Best Buy. Most takeovers like this will be all cash driving he volatility to 0, which should make a $25 target price very nice.
Note the short contract from a risk point of view. While the deal looks to be under $25, a short contract is a short contract.
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